For many years, Ireland was the shining
star in the European Union in terms of economic growth and one of
world’s fastest-growing life insurance markets. The global
financial crisis brought this enviable situation to an abrupt end –
with dire consequences for life insurers being predicted by key
The Republic of Ireland’s success in
transforming itself from an economic backwater into the fastest
growing economy in the European Union made it for many years the
envy of other countries.
Accompanying economic success was a rapid
increase in prosperity, which saw disposable incomes double between
1996 and 2006 and, greatly assisted by a residential property boom,
Ireland became one of the wealthiest nations in the world.
According to Bank of Ireland’s private banking subsidiary the
average wealth per head in Ireland ended 2006 at €196,000
($275,000), placing it second only to Japan.
There seemed no stopping the Irish economic
miracle, with players such as the Bank of Ireland forecasting that
personal disposable income would double again between 2006 and
2016. Unfortunately this picture of economic bliss was brought to
an abrupt end by the onset of the global financial crisis.
With economic growth brought to a juddering
halt, the impact of the crisis on the Irish insurance industry has
been significant, as Brendan Murphy, former president of the Irish
Insurance Federation (IIF), highlighted in his forward to the IIF’s
2008 annual report.
Describing 2008 as a “watershed year” for the
Irish insurance industry Murphy wrote: “A year ago we were still
talking in terms of riding out a credit crunch, whereas now we are
dealing with a major global recession with aggravating local
factors that has made the business environment extremely difficult
for both insurers and their customers.”
Decimating new business
Murphy’s description of the
situation was vividly illustrated by the impact on the Irish life
industry’s new domestic risk business in 2008.
According to the IIF, new life and pensions
business totalled €5.9 billion in 2008, down a massive 43.3 percent
compared with the €10.4 billion reported in 2007. The major damage
was done by single premium business which accounted for 91.6
percent of new business in 2007 and slumped by 47 percent in 2008
to €4.9 billion. The biggest fall was registered by life single
premium business which fell by 65 percent to €1.929 billion.
Faring better, though still down by a sizeable
14 percent, was annual premium new business which totalled €1
billion in 2008. On an annual premium equivalent (APE) basis – all
annual premiums plus 10 percent of single premiums – new business
declined by 29 percent in 2008 to €1.5 billion.
Foreign risk premium income, a major factor in
Ireland’s total life insurance industry, also suffered in 2008
though not to the same extent as domestic risk business.
Based on data from reinsurer Swiss Re new
premium income – domestic risk and foreign risk business –
generated by Ireland-based life insurance businesses in 2008
totalled €23.2 billion, down 40 percent compared with €38.6 billion
Using the IIF’s domestic risk new business
total of €4.89 billion in 2008 this indicates total foreign risk
business of about €18.3 billion, down 11.7 percent compared with
€20.7 billion reported in 2007 by the Irish Financial Services
Regulatory Authority (IFSRA).
However, by far the bulk of foreign risk
business is generated by Ireland-based subsidiaries of foreign
insurers attracted to Ireland by Government initiatives such as the
International Financial Services Centre in Dublin and a low 10
percent tax rate. IFSRA data shows that more than 90 percent of
foreign risk business was attributable to foreign-controlled
companies in 2007.
The slide in new business in Ireland in 2008
brought an end to a trend that had seen domestic risk business
sustain a CAGR of 11.8 percent between 2000 and 2007. Together with
growing foreign risk business this had lifted Ireland’s life
insurance industry from 16th largest in 2000 to 11th largest in
2006 and 8th largest in 2007 based on data from Swiss Re.
Ireland’s life industry slid to 15th position
in 2008, and it appears virtually inevitable that it will end 2009
even further down Swiss Re’s world ranking. This negative outlook
came out clearly in a speech delivered by the IIF’s newly-elected
president Brian Forrester at the organisation’s annual general
meeting on 29 May. Forrester is MD of Bank of Ireland Life,
Ireland’s second-largest life insurer.
Addressing the situation in Ireland, Forrester
painted a bleak picture of new life and pensions business that has
“effectively dried up” and asset values that have been slashed
beyond all predictions.
“Margins are so tight and the prospects so
bleak that our member companies’ very futures are at stake,”
He went on to reveal that in the first quarter
of 2009 new business on an APE basis was down 46 percent compared
with the first quarter of 2008. This slump was again led by single
premium new business which Forrester said had more than halved in
the first quarter of 2009.
An economy in crisis
While Ireland is not alone in
suffering the impact of the global financial crisis the situation
has been considerably exacerbated by certain aspects of its
economic structure. Among these is Ireland’s position as a small
open economy which over the past decade has placed heavy reliance
on growing consumer affluence underpinned by rising property values
to drive economic growth.
Reflecting the severity of the economic crisis
that has beset the country, the Organisation for Economic
Cooperation and Development (OECD) predicts that Ireland’s GDP will
have declined by 14 percent from the peak in 2007 to the
anticipated trough in 2010. The steepest fall in GDP is forecast
for 2009 at -9.8 percent, compared with -2.3 percent in 2008.
This three-year decline will have followed
years of strong GDP growth which in 2006 and 2007, for example,
attained 5.7 percent and 6 percent, respectively.
Ireland’s severe economic recession is being
reflected in a steep rise in unemployment, which stood at only 4.4
percent in 2006 and 4.6 percent in 2007 before rising to 6 percent
in 2008. The OECD forecasts that unemployment will stand at 12.2
percent at the end of 2009 and 14.8 percent at the end of 2010.
Unemployment stood at 11.9 percent at the end of June 2009, the
highest level in 13 years.
The OECD’s unemployment forecast may even
prove to be optimistic. Based on the average of forecasts by the
Irish Department of Finance, the Ireland-based Economic &
Social Research Institute and Irish stockbrokers, Davy &
Goodbody unemployment will reach 13.4 percent by the end of 2009
and 16 percent by the end of 2010.
The economic crisis has also placed
considerable demands on the Irish government to provide support for
the country’s beleaguered banking industry at a time when financial
flexibility is extremely constrained.
Indicative of the severity of the problem, in
2007 the government estimated that its tax receipts would be about
€56 billion in 2009. By the second quarter of 2009 that estimate
had been slashed by almost 40 percent to €34 billion. Summing up
the economic situation in Ireland in a recent analysis, the OECD
paid particular attention to what it termed “severe pressure on the
public finances”. The OECD predicts that in 2010 economic activity
in Ireland will begin recovering but, it stresses, only at a slow
Insurers face increased
It is not only the devastating impact on new business and sombre
economic growth prospects that is of serious concern to Ireland’s
life insurance industry. So too is the government’s reaction to the
Clearly on a hunt for additional revenue the
government announced in what was termed its Emergency Budget in
April 2009 the introduction of a levy in the form of a stamp duty
at the rate of 1 percent on premiums received by an insurer on or
after 1 June 2009.
In his speech at the IIF’s annual general
meeting Forrester emphasised the life industry’s concerns relating
to the levy.
“We are extremely concerned at the impact on
employment in the pensions and investment sector of the life
assurance levy recently announced by government,” said Forrester.
He stressed that the levy would have a significant distorting
effect on the pensions and investment markets, as it does not apply
to competing products available from other financial
“The projected income to the state of the levy
has already been grossly overestimated given the fall off in new
business, and does not take account of the likely further drop in
sales following its introduction,” said Forrester.
The IIF is engaged in discussions with the
Irish Department of Finance in an effort to have the 1 percent levy
However, the life insurance industry’s
protestations appear likely to receive little sympathy from a
hard-pressed government, indicates the OECD’s verdict on economic
remedial actions that need to be taken.
The OECD advised: “Substantial [state]
spending cuts and increases in taxation are required in the coming
years. Problems in the banking sector must be resolved at a
reasonable cost. Competitiveness would be restored by lower wages
and stronger competition.”
For now at least prospects for life insurers
serving Ireland’s domestic market is, in general, far from
promising. However, at least one domestic risk market participant,
Swiss insurer Zurich Financial Services’ Zurich Life Ireland (ZLI),
has proved that it is possible to beat the odds.
ZLI, formerly Eagle Star Life, reported
exceptional results in the first quarter of 2009 by limiting its
decline in new business to 18 percent on an APE basis to €40.2
million compared with €49 million in the first quarter of 2008.
In the process ZLI improved its new business
margin from 20 percent to 23 percent and its market share from 9.8
percent to 14 percent.
Commenting ZLI’s CEO Michael Brennan said:
“Our market leadership in pensions has been the major factor in our
success but we have also increased our focus on protection over the
last 12 months.
“Those people who have seen a sharp fall in
their wealth as a result of the collapse in the property market,
urgently need to safeguard their families by replacing that lost
wealth with life insurance protection.”
Clearly all is not lost for Ireland’s life